Joe Hockey's budget will hurt your hip pocket

If you think you’re having trouble coping with the rising cost of living now, just wait until you see what the politicians have in store for you over the next three years. In all likelihood, you’ll be losing a significantly higher proportion of your pay in income tax, though people on low incomes will be hit a lot harder than those on high incomes.

This will happen because an increase in the overall tax we pay is inevitable, but it suits both sides of politics to avoid the obvious, up-front increase that would come from raising the rate of the goods and services tax (or from extending the tax to spending on fresh food, education and healthcare) and rely on what Malcolm Fraser called ‘‘the hidden tax of inflation’’ – otherwise known as bracket creep.

The pollies know voters much prefer any increase in taxation to be hidden from their view. Trouble is, the increase in ‘‘marginal’’ tax rates (the tax on the last part of your income, such as on a pay rise or some overtime) many workers face will be so big, you’d have to be pretty thick not to notice.

Treasurer Joe Hockey has been softening us up for the tough budget he’s preparing for next month. Fine by me. But he’s studiously avoiding admitting there’s no way his spending cuts will get the budget back into lasting balance. He’s pretending all the problem is on the spending side (and all caused by Labor), when he knows the problem on the budget’s revenue side is just as big, if not worse.

Consider the facts. Collections from company tax – which account for about a fifth of total tax collections – aren’t likely to grow any faster than the economy (gross domestic product). And collections from indirect taxes – which include the goods and services tax and excises on alcohol, tobacco and petrol – are likely to grow a lot more slowly than GDP.

Collections from excises are declining relative to the rest of the economy, partly because John Howard abolished the indexation of the petrol excise, but also because consumers’ spending on alcohol and tobacco accounts for an ever-declining share of their total spending.

Collections from the GST are also in relative decline, because consumer spending has stopped growing faster than the overall economy (as it did when households were borrowing heavily) and because consumers’ spending on items subject to the GST is growing more slowly than overall consumer spending. Putting it another way, private spending on untaxed education and healthcare is growing faster than our spending on taxed items.

That leaves collections from income tax, which account for about half the federal government’s total collections. Assuming regular tax cuts, income tax collections will grow in line with GDP. Only if further tax cuts are avoided will continuous bracket creep mean income tax collections grow strongly enough to make up for the revenue-raising deficiencies of the GST and other indirect taxes.

Guess what? All the budget projections Hockey is using to justify big cuts in government spending assume no further income tax cuts. Without that assumption the underlying weakness on the tax side would be apparent.

His first reason for ignoring the budget’s revenue-raising weakness is his need not to expose as wishful thinking the line Tony Abbott ran from the moment he became Liberal leader, that the Libs stood for low taxation, opposed all ‘‘great big new taxes on everything’’ (except the GST, of course) and should be voted for by anyone who didn’t like the sound of the carbon tax or the mining tax.

Hockey’s second reason is that any hint of increasing the GST (or any other tax) would allow Labor to do to Abbott what Abbott did to Labor. The party of higher government spending opposes the other side’s new taxes for reasons of blatant political advantage.

But Labor also professes to oppose the GST because it’s ‘‘regressive’’ – taking a higher percentage of low incomes than of high incomes. It must face the unpalatable truth that the past eight tax cuts have left us with a rate-scale that now makes bracket creep highly regressive.

Consider this. The average full-time wage next financial year, 2014-15, will be about $76,000. On the basis of reasonable assumptions about the growth in wages over the three years to 2017-18, you can calculate that someone on half the average wage would see the proportion of their wage that they lose in tax increase by 3.5 cents in the dollar.

For someone on the average wage the increase would be 2 cents in the dollar. On twice the average wage it’s 1.1 cents. And on six times the average wage it’s 0.8 cents.

Now that’s regressive. Does Labor really think a rise in the GST would be much worse?